Question

What are the five components of national income?

Short answer

The five components of national income are: consumption, investment, government spending, exports, and imports.

Step-by-step solution

Component 1: Consumption

Consumption refers to the total spending by households on goods and services, excluding new housing, over a given period. These goods and services can include food, clothing, healthcare, and recreational activities.

Component 2: Investment

Investment is the measure of spending by businesses on capital, not households. This could include construction of new establishments or improving their existing capacities or inventory adjustments.

Component 3: Government Spending

Government spending refers to all spending by government on goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits.

Component 4: Exports

Exports refers to the total value of all goods and services produced domestically by a country and sold abroad.

Component 5: Imports

Imports are subtracted from the total value because imported goods will be included in the value of the three demand-side components: consumption, investment, and government spending, but they are not produced domestically. So, to avoid counting them twice, we subtract them.